Questionable Institutional Quality

Over the last decade, we have been witnessing a degrading quality of large institutional investors including their own investment research and outsourced due diligence. That trend has become obvious after collapsing the giants like Lehman Brothers or Bear Stearns; however, its causes have never been investigated in details.

Though we may find tons of articles attributing the finance meltdown to an abstract subprime mortgage crisis or a market cyclicity, the press seems to be reluctant to dip further to the bottom and analyze the real reasons. We believe that the devastating trend was triggered by one major reason - an incredible institutional incompetence across all levels, from the top management down to risk analysts and portfolio managers.        

While it is not our aim to analyze the reasons created the favorable environment supporting and protecting such incompetence, we can only state the facts based on our own experience of dealing with hundreds of institutions of all calibers, including top investment banks, superannuation funds and medium investment houses. Based on the given facts, we have to adopt the sensible approach to the due diligence frameworks and a common perception of institutions as safe havens:

A dedicated investor should not rely on big names as a warranty of quality and professional investment, neither consider institutional employees as experts in their fields by default. It is not a case anymore. The only way of justifying any asset allocation is through sophisticated due diligence incorporating both the qualitative and quantitative elements.

 

Large institutions tend to employ a less competent staff than their small peers. It is, probably, explained by the practice of staff placement solely based on the "career promotion skills and intrigues" rather than professionalism. Smaller institutions simply cannot afford this.

 

We believe that the only way of moving forward is through a complete house cleaning and inevitable collapse of big-to-medium players, because the rotten structures rooted on corporate hypocrisy and incompetence cannot be healed. As such, investors have to be even more careful when considering allocations to the used-to-be bulletproofed parties.
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